Developers switch from housing to hotels

The boom in tourism and the uncertainty in the housing market have changed the priorities of many real estate developers as new hotels flourish.

In recent years the long-standing monopoly in the hotel market has been broken. Previously the market had been shared between a very small number of players, mainly large chains of hotels such as Isrotel Ltd. (TASE: ISRO), Dan Hotels, Rimonim Hotels and Fattal Hotels. More and more players, small, medium and big, are entering the fray. Some of them are typical real estate developers that sat back and decided to expand the scope of their operations to an area that for many years was considered too risky and volatile, especially for a country like Israel.

The government has also done its part for this new trend. In June 2016, the government gave its approval for independent local councils to approve the conversion of 20% of construction rights for hotels to residential - a flexibility that made hotel projects more attractive. In addition, the Knesset passed an amendment last December to the Building and Planning Law authorizing local councils to approve the conversion of office and commercial projects to hotels.

One of the major players that has now moved into the hotel business is real estate developer Nitsba Holdings Ltd. (TASE: NTBA), controlled by Haim Tsuff and Koby Maimon. Back in October 2015 the company bought the Princess Hotel In Eilat after it encountered financial difficulties (the hotel is currently in a neglected state). Nitsba is currently building 2,000 hotel rooms including an 880-room hotel in a 45-floor high-rise adjacent to the Azrieli Sarona Tower in Tel Aviv, which will be called the Sarona Hotel. Nitsba is also building a 270-room hotel in Haifa, and two hotels in Jerusalem - one on the former Ministry of Foreign Affairs complex and the other above the Central Bus Station. Nitsba has also filed a request to build a 250-room hotel in Airport City adjacent to Ben Gurion airport.

All the hotels are being built by Nitsba on lots zoned for hotels and won in Israel Land Authority tenders. Nitsba is expected to link up with a major Israeli or international hotel management group that will operate the hotels.

Another major deal in the hotel sector was completed by the Dayan family, which recently acquired the Crowne Plaza chain from Africa-Israel Investments Ltd. (TASE:AFIL) and Netz Group for more than NIS 900 million. The chain comprises eight hotels - two in Tel Aviv, two in Haifa and hotels in Jerusalem, Eilat, the Dead Sea and Ashkelon. The Dayan family, represented by Adv. Tal Benenson, has also bought the historic building at the corner of Allenby and Nahalat Binyamin Streets, which currently operates as the Poli House boutique hotel, operated by the Brown Group, as well as other small hotels in Haifa and Eilat. The Dayan family has also signed a NIS 70 million agreement to manage a hotel being built by the Hagag Group on Tel Aviv seafront near Tel Aviv Port.

Other interesting players moving into Israel's hotel scene include tourism and travel agencies such as ISSTA Lines (TASE: ISTA), a pioneer in the field, and Aviation Links Ltd. (TASE: AVIA). "In the past companies were careful not to go into the territory of the hotel companies but they have changed their approach in recent years and entered the market," said Adv. Kfir Yadgar, managing partner at Tel Aviv law firm Gornitzky & Co.

"The thinking of the tourism companies for example," he continued, "is that they are already selling flights and packages and they have control of the destinations to which they are channeling consumers, so why should they forego an extra link in the chain as hotel service providers and just make do with fees from the hotels, as in the past. This change has led to the entry to Israel of hotel chains from abroad and international brands, after most of them left Israel in the early 2000s (at the start of the second intifada). Suddenly, foreigners have started understanding that terrorism is not unique to Israel and also afflicting Paris, London and Istanbul, even as a matter of routine. Consequently, what struck them as scary, unique and different 10-15 years ago, is today taken for granted."

One of the strongest players that has entered the Israeli boutique hotels market, starting from scratch several years ago, is the Brown Group, which today has 10 hotels.

One of Brown's owners Leon Avigad said, "When we opened the first Brown Hotel on Tel Aviv's Kalischer Street, we were on our own. Banks didn't know how to finance hotels like these, and among the developers it was clear that the residential sector was paramount in terms of economic feasibility and somewhere at the bottom of the list was the hotels sector."

He added, "Today the story is different. There is still a shortage of hotel rooms and proof of that is that dozens of buildings in Tel Aviv that are leased as long-term apartments are rented to tourists in addition to many apartments that are rented to tourists "off-the-books" in order to evade taxes.

Avigad adds that the Brown brand today includes ten hotels in Tel Aviv and Jerusalem as well as a hotel in Croatia. "We are developing all the time and we are currently opening new operations in the low-cost sector with our first hotel at the corner of Gordon and Ben Yehuda Streets (in Tel Aviv) and we are interested in other regions such as Eilat and the north. 75% of overnight stays are from overseas tourists and there are even no small number of Israelis from Kfar Saba or Petah Tikva for example that want to take time out from the rat race and have a peaceful vacation in a boutique hotel in Tel Aviv or Jerusalem. The trick today is to create a hotel that has something from the past and not just another hotel to suit an excel spreadsheet. You want a guest to feel this not only when actually in the hotel but also when searching for a hotel on the Internet."

Another interesting player is Shatit owned by Shalom Shitrit, a veteran real estate developer. Shitrit has always been drawn to hotels and 16 years ago he opened the 16-room Villa Carmel Hotel in Haifa, which also has a small spa. It was one of Israel's first boutique hotels. About ten years ago, Shitrit bought three lots in Haifa for hotels at a relatively low price that allows hom to build today three hotels with 555 rooms.

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Shitrit said, 'Alongside our routine real estate operations, we've had a vision and desire to be in the hotel business. My wife learned the business and after we opened the Villa Carmel, we decided to locate some more lots for hotels. On one of them on the slopes of the Carmel Forest, we are currently building the Kedem Hotel, which will have 84 rooms. We are finishing the shell of the building and we expect it to open in February 2019 and it will include a spa and treatment center. It will give what the Carmel Forest Spa Hotel gives but at half the price. The healthcare field will become more and more a necessity and less and less a luxury. We are in talks with management companies from Israel and abroad that have experience in the healthcare field and I assume these talks will result in deals in the coming few months."

The second hotel that Shatit is building is in Haifa's German Colony and it has 165 rooms and a commercial center and here too the company is in talks with international management companies like Marriott and Hilton. The third hotel that the company is building is on Haifa's Shderot Hanasi. This is a 24-floor building that will include a mixture of hotel rooms and apartments. Shitrit said, "When we bought the lot, it did not include residential construction but then the government gave the incentive of allocating 20% of hotel projects for residential purposes and that applies to this project."

Shitrit stresses that if three years ago the residential real estate market was seen as safe and the hotel market as uncertain, today the situation is reversed. "Nobody knows what will be with the residential market but the tourism market is undergoing massive growth. There is no question today as to whether the hotel sector is economically feasible or not while there is a question market over the housing market. In 2020, Israel is expected to host 4 to 5 million overseas tourists annually. European tourists who have visited Greece and Turkey will see Israel as an alternative. I've no doubt that in the lobby of the hotel in the German Colony we will see sheikhs from Abu Dhabi sitting alongside women from Europe. Our economic model expects 70% foreign tourists but in a concept hotel like the Kedem we will also have internal tourism because it also has added value."

"One of our challenges is to bring more international chains," said Minister of Tourism Yariv Levin. "The Club Med chain, for example, has already announced that it is interested in returning to Israel and setting up a leisure village at Dor Beach (south of Haifa)."

Levin added, "The problem is that they haven't built hotel rooms here for 15 years. There is particularly a lack of three star hotels in city centers. It's a product that we have not been able to offer young tourists. And this lack has become more acute as the low-cost trend has strengthened worldwide along with demand for rooms for this group."

He continued, "We have implemented a range of measures to change the situation by expanding our map of preferred regions, and encouraging the conversion of existing buildings to hotels, which makes costs must lower for the developer. Another type of problem was the banks that wouldn't give credit for hotels. We have succeeded into creating a channel for financing by insurance companies and allocating 205 of projects for housing in hotel projects has creating new financing from the banks that are less scared today about financing mixed projects. As a result new players are coming into the field."